I think we may be in for some tough economic times ahead. I'm not preaching End of the World (we still need to keep our heads in the sand a little bit longer for that), but another recession. I don't think we can avoid it, but we can learn from our mistakes.
Over the past few years Americans have fueled a remarkable degree of growth in the American economy thanks to growing consumer spending -- in spite of the fact that the median household income in the U.S. has been flat (at $44,000/yr) since 1999 (src: NY Times, 9/24/2005). How does that magic happen? Cheap credit! Lured by low credit costs we have been renovating our homes, buying new cars, taking fancy trips, and snagging consumer goods such as computers, plasma TV's, and the latest fashions at record rates. Booming home prices have allowed many Americans access to even more credit via home equity lines. It's been one giant free money party -- and one that has driven the American economy well for several years.
Unfortunately, inflation was already a concern, but the rising costs of energy are accelerating the cost of living dramatically for everyone. With inflation comes higher interest rates: the hangover after the party. Americans are starting to face higher costs at the same time they are watching the interest rates on their debts rise. It's a deadly one-two punch for consumer spending (which makes up the bulk of our economy).
In many cases we can make choices such that inflation in any one product doesn't have to crimp overall spending. Coffee too expensive? Switch to cola. Unexpected jump in clothing costs? Spend your money on a new TV instead.
Energy, though, that's another beast. Unless you made a decision to live where you have an alternative, you have to make your 5-times-a-week commute to work and home. You can't suddenly choose not to do it. If it is costing you an extra $100/month at the gas pump you can continue your current lifestyle if (a) you cut your savings rate or (b) you deficit spend.
Oops: we already (as a nation) have a non-existent savings rate! Maybe deficit spending? Oops! Already done that as well.
Now we add insult to injury: inflation in energy trickles over to inflation everywhere else. All the stuff we buy takes energy to make and energy to ship. Worst of all, though, inflation drives up interest rates. That debt is suddenly getting a lot more expensive.
So, as a nation we are tapped out. We have no savings and lots of debt that's getting more and more expensive to hold. The government is tapped out as well, so don't expect relief there. So now what do you do?
You slow down. Skip the vacation. No shopping for flat screen TV's. No designer shoes. Eat in more. Start living within your means. You get worried, so you start *finally* paying down debt.
What happens if everyone does this? In the long run, we'll be in much better financial shape. We'll have rainy-day funds. We'll be able to pay cash rather than use credit.
In the shorter term, though, if the American consumer cuts back in order to put their fiscal houses in order, the economy is going to tank.
I believe that the economy has had such consistently amazing growth over the decades because Americans are such stubbornly optimistic people. We'll spend today if the credit is cheap because we can pay it off with next year's raise. It becomes a self-fulfilling prophecy because spending leads to economic growth, except that this time the growth never trickled down to the middle class (where the bulk of spending occurs).
I don't see a way to dodge this one. I think we're going to have to take it on the chin. We'll be better off for it eventually, but it's going to hurt in the meantime: a "character-building" experience.
As for me, I'm getting my fiscal hosue in order. My spending is way down. I bike to work now that gas costs so much. I run fewer errands and therefore spend less on impulse purchases. My family is better off for it day by day. Of course, that means I'm contributing less to the economy which means a little less economic growth for everyone.
I guess I'm part of the problem, and part of the solution.